“Adaro Enterprise Risk Management (ERM) builds a strong foundation for smart/calculated risk taking. Adaro ERM focuses on strengthening implementation, which has constituted almost all divisions across the companies within the Adaro Group. This approach paves the way toward group-wide ERM excellence.”
The key risk management principles set forth in the Adaro Group’s risk management policy are as follows
understood before making key business decisions.
integrated into the management cycle of the company and embedded in planning processes, at both the operational and strategic level.
3. Being part of decision making
used in selecting appropriate decisions by taking into account the information on the risk exposure of every option.
managed to address uncertainty, put control mechanism, maximize opportunity and minimize negative impact.
5. Systematic, structured and timely
applied in a systematic, structured and timely manner across the Adaro Group to ensure efficient and reliable results.
6. Based on the best available information
managed using the best available relevant information with the awareness that some key information cannot be obtained.
7. Inclusive and transparent
engaging internal and external stakeholders in each step of risk management process and being transparent about all mitigation actions and the progress
8. Reassessed periodically
re-assessed periodically to identify whether there are new risks and risks that are no longer relevant.
communicated with the relevant stakeholders in order to obtain appropriate responses so that risks can be mitigated effectively.
The implementation of risk management, from defining objectives, assessing risks, formulating mitigation, until synchronizing plans, is performed by subsidiaries and coordinated by each Risk Champion.
As of December 2019, the Adaro Group had a total of 132 Risk Champions spread in all subsidiaries. Each subsidiary and division had at least two Risk Champions who had attended a two-day Enterprise Risk Management training. They are responsible for facilitating risk assessment process, aligning risk profiles with annual plans and budgets, and discussing the matters in the associated management meeting, to ensure the mitigation of key risks in their respective organization.
At the corporate level, the summary of consolidated risk profile for the Adaro Group is as follows:
- As at December 2019, there were eight types of risks which were categorized as high and key risks, in which one out of these was a new risk categorized as key risk, i.e. production cost risk, while the security threat risk and people risk levels decreased from high to moderate.
- Compared to the previous year, the number of key risks decreased from nine to eight key risks, while the other 20 types of risks, which were at moderate and low levels were closely monitored and treated properly.
AE’s risk focuses in 2019:
1. Regulatory changes risk
The regulatory changes risk is associated with the regulatory changes that may affect the group’s ability to implement the company’s strategies, execute major transactions, comply with contracts, and other activities.
The level of regulation changes risk in 2019 remained high and it is predicted to stay the same in the next year.
The regulations of the Adaro Group’s concern in 2019 are:
- Law no. 4 of 2009: Adaro Indonesia’s Coal Contract of Work (CCoW) will expire in 2022.
- MoEMR Ministerial Regulation No. 10/2018 concerning the Second Amendment to ESDM Ministerial Regulation No. 10/2017 regarding Power Purchase Agreement related to the provisions of force majeure
- MoEMR Ministerial Regulation No. 12/2017 concerning Utilization of Renewable Energy Sources for Provision of Electricity
- MoEMR Ministerial Regulation No. 53/2018 concerning the Amendment to MoEMR Ministerial Regulation No. 50/2017 concerning Utilization of Renewable Energy Sources for Provision of Electricity
- MoEMR Ministerial Regulation No. 19/2018, concerning the Second Amendment to MoEMR Ministerial Regulation No. 7/2017 regarding the Procedure for Determining Metallic Mineral and Coal Reference Price regarding Coal Selling Price for Domestic Consumption
- MoEMR Ministerial Regulation No. 26/2018 and MoEMR Ministerial Regulation No. 50/2018 concerning the Implementation of Good Mining Practice and Supervision on Mineral and Coal Mining
- MoEMR Ministerial Decree No. 1827K/30/MEM/2018 concerning Implementation Guidelines for Good Mining Practice
- MoEMR Ministerial Decree No. 23K/30/MEM/2018 concerning the Determination of the Minimum Percentage of Coal Sales for Domestic Consumption in 2018
2. Macroeconomic risk
The macroeconomic risk arises from the changes in broad economic conditions, as it may threaten the company’s ability to effectively conduct business, impact on the overall size and growth of the company’s markets, and reduce unit sales, pricing power and profitability.
The macroeconomic risk remained high in 2019 and the challenging economic condition may continue to the next year. The macroeconomic fragility and financial inequality may continue to give the downward pressure on the global economy. The pressure may continue to intensify to increase the risk of economic stagnation.
To anticipate such risk, AE secured healthy cash flows and the right capital structure to support more aggressive business investments in uncertain global conditions while maintaining prudent financial management and continuing to focus on operational excellence and efficiency.
3. Project risk
The project risk is associated with the failures to complete projects according to the budgeted costs, time schedule, and quality.
AE’s project risk in 2019 remained high as some of the Adaro Group’s key projects were still in in the completion phase. At the end of 2019, the construction progress of PT Bhimasena Power Indonesia’s 2x1,000 MW coal-fired power plant (CFPP) project had reached 91.8% and the commercial operations date (COD) is expected to be at the end of 2020 pursuant to the Power Purchase Agreement with PLN, although it may experience a couple of months of delay. Meanwhile, Unit 1 of PT Tanjung Power Indonesia’s 2x100 MW CFPP had been commissioned and commenced commercial operations in September 2019, and its Unit 2 on December 14, 2019.
The constructions of Coal Handling and Processing Plant (CHPP) and Lampunut hauling road had been completed in the end of 2019 and the commissioning is underway. The facilities will be ready to support Maruwai’s first coal production in February 2020.
The project to expand PT Adaro Indonesia’s mining area “Tapian Timur” was rather slow in its progress, especially with regard to technical requirements. As at December 31, 2019, the total cumulative progress for the three main jobs (HDM Drilling and Site Preparation, IPM Plug and Abandon, Site Preparation, EPC Upgrading Production Facility and Dismantling Production Facility) had reached 59.07% while the cumulative costs spent for the whole activities had reached 73.91% of the total approved budget.
To ensure that the projects progressed as planned, completed on time and according to the agreed budgets and quality, the Adaro Group selected reputable contractors, established a solid project management team and managed project risk.
4. Industrial risk
The industrial risk is the risk arising from the changes in industrial opportunities, which affects the company attractiveness or the long-term viability of the industry.
AE’s industrial risk in 2019 still remained at a high level and it is predicted that it will remain the same in the next year.
The thermal coal business in 2019 was still the group’s cash cow while the coal price volatility risk will remain relatively high in the future.
To reduce this dependence on this industry, the Adaro Group has established eight business pillars for different industries to capture various opportunities along its value chain. Each pillar is expected to grow along with the growth of coal fired power plants in Indonesia and Southeast Asia.
AE will spur the growth of the non-thermal coal business to diversify its business and increase its contribution to the group significantly. The acquisition of Kestrel which produces high quality coking coal has further expanded the product portfolio and provided new opportunities for the Adaro Group. As steel production and consumption continue to grow, global seaborne demand for metallurgical coal is expected to increase from 313 Mt in 2019 to 422 Mt in 2040 (source: Wood Mackenzie, Global metallurgical coal long-term outlook H2 2019 slidepack).
For expanding its power business, AE intends to undertake the following projects :
- electrifying AI’s mining operations for optimizing MSW’s capacity;
- developing a 467 kWp solar PV at Kelanis in addition to the 100 kWp which had been operating previously; and
- developing a mini-hydro power plant of 3MW capacity to replace the existing diesel power generators to support AMC operations in Maruwai Coal.
5. Legal and regulatory compliance risk
The legal and regulatory compliance risk arises from lawsuits against the company, inadequate contract clauses, and regulatory incompliance that may lead to liabilities for damages, fines, legal fees, damaged reputation or other negative impacts.
The companies within the Adaro Group are subject to a lot of ministerial, regional and other regulations and the incompliance with the regulations may lead to damage to reputation, sanctions, legal costs and other bad implications.
AE’s legal & regulatory compliance risk remained at a high level in 2019 and it is expected to continue in the next year since this risk type is associated with risk appetite, thus full commitment must be given to the compliance with the legal & regulatory requirements without exception.
Several strategic business units within the Adaro Group had begun implementing the compliance program since 2017, by identifying all regulations that have to be complied with, conducting self-assessment against all relevant regulations in all areas with the assistance of External Relations, and discussing the assessment results to ensure compliance.
The Adaro Group continuously develops the system that will enable this compliance program be carried out by all AE’s subsidiaries in the future.
6. Health, Safety and Environment (HSE) risk
HSE risk arises from the failure to provide a safe working environment for the workers and the activities that are harmful to the environment, which exposes the company to the costs related to compensation liability, loss of business reputation or an increase in insurance costs.
In 2019, AE’s HSE risk remained high. AE recorded 129,093,268 total man hours with the Lost Time Injury Frequency Rate (LTIFR) and Severity Rate (SR) of 0.06 and 5.46, respectively. This exhibits the improved safety performance in managing and safety risk.
In managing the HSE risk, the Adaro Group carried out the following programs:
- strengthening Adaro Zero Accident Mindset (AZAM);
- fully complying with AMDAL, hazardous waste, reclamation plans, and mine closure plans;
- conducting annual HSE performance evaluation;
- implementing HSE management system across the Adaro Group with the support of Adaro Safety Committee consisting of top executives of the strategic business units;
- conducting quarterly meetings between AE’s BoD and HSE team; and
- enhancing HSE competency through e-learning (ALMS).
The environmental concerns has alarmed the global business world and dominated the long-term risks list in global economic forums. The failure to mitigate and adapt to climate change is perceived of high risk by its impacts and there is a likelihood that it will happen until ten years ahead.
In addressing the above environmental concerns, the Adaro Group has established an energy management system based on ISO 50001 in order to enhance energy efficiency, and this key measure will also reduce greenhouse gas emission.
PT Adaro Indonesia received the PROPER Gold Award from the Ministry of Environment and Forestry. Proper Gold is the highest environmental rating in Indonesia. It exhibits AI’s commitment to apply and manage environmental risk in its entire operations.
7. Business Interruption
The business interruption risk arises from major damages to key facilities and infrastructure such as bridges, hauling roads, coal handling terminals or the obstructions in the river channel that may cause long-term stoppages of operational activities.
The Adaro Group’s Crisis Management Team (CMT), which was formed in 2015, has identified three major events that may incur catastrophic impacts on the Adaro Group’s business activities. CMT has also prepared an optimum planning program to handle catastrophic events.
On 4 December 2019, the company performed a drill for crisis handling in the case that Tabalong hauling bridge is inoperable, which involved the mining, services, logistics and power business lines. The drill demonstrated the company had good ability to make the right decisions to restore the operations in fast and proper manner.
The Crisis Management Team in all business units of the Adaro Group has prepared Crisis Management Plan and a drill program for the next five years and will conduct the drill regularly every year to improve the readiness in dealing with any crisis situation.
The crisis drill was primarily aimed to:
- improve the readiness, leadership, coordination, communication and decision making process of the personnel during a crisis situation;
- promulgate and get the personnel to be accustomed to the plans and responsibilities when dealing with crisis situation;
- validate the capability of the organization before the real crisis situation occurs;
- identify the gap or area of improvement on the plan and personnel; and
- increase the chance of success when dealing with a real crisis situation.
The drill exercised help to educate the CMT members and the organizational functions of their roles and help to raise a number of issues which are difficult to foresee without being in the situation to respond to the incident in the exact same way as predicted. Considering the above objectives of the drill, overall, the crisis incident was managed well. Coordination and key information flows between the strategic business unit of crisis origin (AI) with the affected strategic business units was good and collaborative. Although there were still rooms for improvements, the preparedness for crisis is considered sufficient, so that in a real incident, the crisis will be managed successfully.
After the drills have been carried out periodically, it is expected that this risk can be reduced.
The Adaro Group also has insurance coverage against business interruption caused by the damage to critical facilities.
8. Production Cost Threat
The production cost risk arises from the adverse price movements of key production cost components, such as fuel price, labor cost, and the cost of main contractors.
In 2019, AE’s production cost risk increased from moderate to high. When the coal price drops and costs increase, AE must respond correctly, by taking measures other than the traditional cost cutting measures to maintain the mining profit margin. The operational excellence and efficiency to improve productivity is the key factor for AE in addressing this problem.
The anomaly of the world economy, which moves currencies and commodity prices cannot be controlled fully and directly by a single company. To respond to this risk correctly, AE managed the control on operations. This way, AE focuses on operational excellence and efficiency in all business processes to bring costs down consistently.
Some strategies applied include improving budget management and risk management, improving mine planning, using technology to improve efficiency i.e. GPS system – visual in the mining operations from pit to port, Adaro 1ERP, optimizing operations through the continuous improvement program.
Effectiveness of Risk Management Implementation
The implementation of risk management within the Adaro Group has been implemented effectively and consistent with the fundamental principles of risk management as described on the beginning part of this section.